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An Auction-Based Test of Private Information in an Interdealer FX Market

Author

Listed:
  • Pietro Bonaldi

    (Carnegie Mellon University, Tepper School of Business)

  • Mauricio Villamizar-Villegas

    (Banco de la República de Colombia
    Banco de la República de Colombia)

Abstract

There are several financial markets where a few dealers trade a large share of total volume, while also having access to periodic auctions of the same asset conducted by a third party. For such a market, we derive a test of private information about the value of the asset that combines data on both bidding behavior and market trades. Our approach is to test for private versus common values, as defined in auction theory. We use changes in trading prices of extreme bidders before and after the auction to test the null hypothesis of private values (no private information) against the alternative of common values (private information). Additionally, we use a regression discontinuity design where we compare the behavior of dealers bidding right below and right above the auction's cutoff price to control for inventory effects. Our case study are foreign exchange auctions conducted by the Central Bank of Colombia during the period 2008-2014, and the corresponding interdealer market for Colombian Pesos against US dollars. Overall, our test rejects the null hypothesis. Specifically, information revealed to the bidders about their relative valuations has a subsequent effect on trading prices, at an hourly trading window, equivalent to 23% - 39% of the standard deviation of currency prices. **** RESUMEN: Existen varios mercados financieros en los que algunos intermediarios tranzan una gran parte del volumen total, además de tener acceso a subastas periódicas del mismo activo realizadas por un tercero. Para dicho mercado, derivamos una prueba de información privada sobre el valor del activo que combina datos sobre el comportamiento de las pujas y las transacciones de mercado. Nuestro enfoque es probar valores privados versus valores comunes, tal como se define en la teoría de subastas. Utilizamos cambios en los precios de mercado de los postores extremos antes y después de la subasta para probar la hipótesis nula de valores privados (sin información privada) frente a la alternativa de valores comunes (información privada). Además, utilizamos un diseño de regresión discontinua en el que comparamos el comportamiento de los postores que ofertan justo debajo y encima del precio de corte de la subasta para controlar por posibles efectos de inventario. Nuestro caso de estudio son las subastas de divisas realizadas por el Banco de la República de Colombia durante el periodo 2008-2014, y el mercado cambiario correspondiente de pesos-dólar. En general, nuestra prueba rechaza la hipótesis nula. En particular, la información revelada a los postores sobre sus valoraciones relativas tiene un efecto sobre los precios de mercado, en una ventana de una hora, equivalente al 23% - 39% de la desviación estándar de los precios de las divisas.

Suggested Citation

  • Pietro Bonaldi & Mauricio Villamizar-Villegas, 2018. "An Auction-Based Test of Private Information in an Interdealer FX Market," Borradores de Economia 1049, Banco de la Republica de Colombia.
    • Handle: RePEc:bdr:borrec:1049
    DOI: 10.32468/be.1049
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    More about this item

    Keywords

    Auctions; Common Values; Private Values; Private Information; Foreign Exchange Market; Regression Discontinuity Design; Subastas; Valores Comunes; Valores Privados; Información Privada; Mercado Cambiario; Regresión Discontinua.;
    All these keywords.

    JEL classification:

    • C57 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Econometrics of Games and Auctions
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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